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How Advisory Boards Can Help Your Startup

by Adam Quinton

I recently had a lively discussion with Yolanda Wardowski from the Avalon Group on the subject of Advisory Boards. This helped me frame some more specific thoughts which I am sharing in this post. I came up with 12 observations. What did I miss? What don't you agree with? All comments appreciated!

startups, angel investingThe Big Picture

1. In my view Advisory Boards can give start ups great advice and access as well as being a resource that is always "there for you". But, in the vein of "take advice, don't follow advice", a CEO needs to balance the input they get from their Advisory Board with their own expertise and the confidence they have in their own and their team's abilities. Bottom line you don't want to be (or be seen to be) too reliant on your Advisory Board.

Advisory Board Basics

2. You can have an Advisory Board at any stage. 
They can add value for the smallest start up through to large public companies.

3. The Board part of the title is a misnomer! This is because Advisory Boards rarely meet ... as a Board. Rather they are mostly all one on one bilateral relationships with the CEO. Communications tend to be ad hoc with perhaps monthly preset check-in calls but with a verbal understanding (very early stage) transitioning to written expectations of time expended (later stage.)

Structure and Benefits

4. Cosmetic Advisory Boards are a very bad idea. By this I mean lots of names of "important" people on your website ... but where the reality is these folks do very little for you. Needless to say if investors (or actual/potential customers in a B2B context) ask to talk to Advisory Board members as part of due diligence, and it becomes clear they have no meaningful role, that sends a bad signal. This is especially the case if you put those names in a pitch you deliver to investors. By represented them as being part of your team ... if fact they aren't ... well, let's just say you were being "economical with the truth". So have a functioning Advisory Board, or don't have one at all.
 
5. A CEO/company that who establishes a strong functioning Advisory Board has multiple wins.  First and most obviously you get advice from folks who are consistently involved and add value so in areas that are key to the CEO and the business. But this also sends positive signals to potential investors to the effect that, in addition to that valuable advice: a) You can identify and engage with experienced individuals relevant to your business (so says something about your people skills and judgement) b) The fact that those people are willing to commit time to support you and your business is a form of social validation of itself.
 
6. A well constructed Advisory Board is composed of people with diverse skills/experience that are relevant to the CEO/founding team. Meaning they can support the company's progress in clearly defined areas. e.g. finance, customer acquisition, marketing, scaling, technology etc etc. or who have broader experience e.g. a former CEO in the space who has scaling experience. (How do you find these wonderful people? And how do you work out where an Advisor best fits the companies needs and the CEO/Founders strengths and weaknesses? I don't address those issues here - that is another couple of posts on their own!)

7. Better to have 3-6 strong engaged players than 7+ not very engaged people. Start Ups are time starved so work with a small number of committed partners who can give you time and add value. Avoid everyone else! And by having too many members a CEO will make declining engagement a self fulfilling prophecy, simply because she/he will not have the time to interact with all the Advisors at a meaningful level.

 
8. Whatever role they fill Advisory Board members should expect, and be used, for their full network. Use each Advisory Board member to the full. So the person who has a clear role as your financial expert say could well have valuable connections to the media, to other domain experts or whatever. One thing to be wary of - having a known active investors as an advisor but who is not him/herself an investor in your company. That can send a bad signal too for obvious reasons, although not in my view where that individual's personal investing is clearly focused on another area of domain knowledge or expertise. 

Formal vs Informal

9. At the early seed stage, so at and shortly after friends and family financing, these Boards are usually pretty informal.  This means Advisor relationships are based on a verbal understanding of time commitment and responsibilities. I see no issue with this - avoid red tape at all costs!
 
10. Heading to the A stage and beyond they become more formal. This make sense too in my view. As the business develops having written Advisory Board contracts is the way to go. (Law firms can provide standard versions so this is not a big deal.) The contracts should have specified time commitments (at a minimum) and can include written details of what each Advisory Board member is expected to contribute.

Compensation

11. Advisory Board positions are typically not compensated at the very early stage. This speaks to the informality mentioned above. These are willing supporters who do it for one reason - they have faith in and want to support the founding team.
 
12. At the Advisory Board contract stage stage compensation starts to make sense. As the business expands adding professionalism in all areas is a must. Advisory Board compensation is a matter of agreement but I start from the position that early stage full Board members (who are not founders/VCs) typically get 1% of equity through options vesting over 3-4 years. An Advisory Board member will have less time commitment and no fiduciary responsibility. So, logically, should be paid less. How much less? Something like 0.10%/year seems fair. Maybe more depending on contribution. Again this is a matter of agreement and also the magnitude of the expected benefit to the company. Note that this is not a fee for "showing up" or answering the email/phone from time to time. Optimally this compensation should be tied to specific deliverables and with the options being granted on appointment but not vesting until a later date. (One year out say.) And typically, no cash component ... other that for reasonable expense reimbursement. Advisory Board members are best remunerated through direct connection to the value creation process.